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Long Memory and Tail dependence in Trading Volume and Volatility

  • Eduardo Rossi


    (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy.)

  • Paolo Santucci de Magistris

    (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy)

This paper investigates long-run dependencies of volatility and volume, supposing that are driven by the same informative process. Log-realized volatility and log-volume are characterized by upper and lower tail dependence, where the positive tail dependence is mainly due to the jump component. The possibility that volume and volatility are driven by a common fractionally integrated stochastic trend, as the Mixture Distribution Hypothesis prescribes, is rejected. We model the two series with a bivariate Fractionally Integrated VAR specification. The joint density is parameterized by means of with different copula functions, which provide flexibility in modeling the dependence in the extremes nd are computationally convenient. Finally, we present a simulation exercise to validate the model.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2009-30.

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Length: 43
Date of creation: 13 Jul 2009
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Handle: RePEc:aah:create:2009-30
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